Wednesday, June 23, 2004

Buy Venezuelan Bonds

I have two pieces of Marxist financial advice (note to regulators: no I don't). Depending on your own financial circumstances and risk appetite, blah blah, I would:

1. Find a life assurance company run by people you trust and chuck it all into one of their long-dated policies.

or for the more adventurous

2. Chuck it into the bonds of more or less politically palatable emerging market countries. Venezuela has a few series of quite high-yielding bonds available, and buying them would both help Chavez to buy a little time to fend off the hegemon, and offer the possibility of a nice capital gain when and if he eventually fails and Vene becomes a US protectorate. Sort of a win-win situation, if you have a rather perverse definition of what constitutes a "win". (Progressive Economists Network, June 23, 2004)

Good advice. Despite the Venezuelan oligarchy's repeated attempts at economic sabotage, Hugo Chávez's record of debt management has been excellent, and high oil prices and big foreign reserves should continue to bolster investor confidence:

"I think Chavez will stay in power, whether he avoids the recall or holds the vote and wins," said Jose Pedreira, a managing director at LW Asset Management, a New York-based hedge fund.

Wall Street, put off by Chavez's anti-capitalist rhetoric but impressed by the country's debt management policies, sees smooth sailing for Venezuelan sovereign bonds. They have already rewarded holders with total returns of 34.6 percent so far this year while the rest of the market is up 27 percent.

"Venezuela bond prices have been going higher because, at the end to the day, Venezuela is in good shape in terms of being able to pay its debts," Pedreira said. "Other emerging market countries offer much less yield, which continues to make Venezuela attractive." (Hugh Bronstein/Reuters, "Venezuela Bonds Seen Rising above Political Woes," December 7, 2003)

Venezuela offered to buy back $1 billion of six-month dollar-denominated bonds after a surge in oil prices swelled government coffers.

The government, which had sold the securities to local investors in March, offered to buy the 1.15 percent notes due Sept. 30, 2004, at 100 cents on the dollar, or par.

"They've had huge revenue off the oil side for quite some time and huge reserve levels," said Enrique Alvarez, a Latin American debt analyst with research company IDEAglobal in New York. "And they're very comfortable repurchasing this since they're done selling dollar debt the rest of this year."

Venezuelan oil has averaged $30 a barrel this year, more than the $18.50 estimate the government used to calculate this year's budget. Venezuela, the world's fifth largest crude supplier, will likely receive between $5 billion and $7 billion of extra oil income this year, Central Bank Director Armando Leon said last month. (Alex Kennedy, "Venezuela Offers to Buy Back $1 Billion of Bonds," Bloomberg.com, June 7, 2004)

Venezuelan President Hugo Chávez "has almost unlimited supplies of cash, with Venezuelan oil selling at over $30 a barrel, foreign reserves of more than $23 billion, and few qualms about using public funds to bolster his campaign for a 'no' vote" (Phil Gunson, "Chávez Well-armed in Recall Battle," Miami Herald, June 22, 2004).

Credit rating agencies have been extremely tough on Venezuela, to be sure, but that's only because they are politically motivated. Bondholders have not lost confidence in the Bolivarian Republic:

Venezuela, for instance, is rated Caa1 by Moody's -- one of the lowest ratings, even among high-yield, or "junk," bonds -- and a full two notches below Brazil's B2 high-yield rating. Yet yields for Venezuelan bonds are comparable to those of Brazil. That means the market isn't demanding a higher premium from Venezuela, despite the lower rating.

Investors like Mr. Hopper say this is understandable. Venezuela is a big oil producer and boasts foreign reserves that more than cover its debt, while Brazil's don't. "Venezuela has been volatile, and at times overdiscounted by the market," he says. "The ratings agencies have contributed to that." (Craig Karmin/The Associated Press, "Ratings Take on Political Risk," June 21, 2004)